(I couldnt resist adding this article- about Bernanke's idea on how to stop a depression):Bernanke Finds Lessons in the Great Depression:
Commentary by Caroline Baum
Aug. 17 (Bloomberg) -- Ben Bernanke is a self-described Great Depression buff, which is a good prerequisite for his current line of work as chairman of the Federal Reserve.
Whether the Fed was primarily responsible for the severe and sustained economic contraction of the 1930s, as asserted by economists Milton Friedman and Anna Schwartz, or just bears partial responsibility, is still a subject of lively debate among economic historians almost 80 years after the fact.
Bernanke, for one, wasn't satisfied that the Friedman- Schwartz analysis -- with causation running from a contraction in the money supply to falling prices and output -- completely explained ``the financial sector-aggregate output connection,'' as he wrote in a 1983 paper for the National Bureau of Economic Research (``Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression'').
Instead, he theorized that ``the financial crisis of 1930- 33 affected the macroeconomy by reducing the quality of certain financial services, primarily credit intermediation.''
Translation: Many commercial banks, considered efficient at allocating credit (they have a knack for differentiating ``good'' from ``bad'' credits), failed. The ones that remained solvent wanted to hold liquid assets or, if they were willing to make loans, charged a higher rate of interest.
Then and Now
``It was reported that the extraordinary rate of default on residential mortgages forced banks and life insurance companies to 'practically stop making mortgage loans, except for renewals,''' Bernanke said, citing the work of the late economist A.G. Hart.
Sound familiar? The rate of default isn't extraordinary just yet, but the mortgage market is contracting in leaps and bounds, starting with originations and ending with securitizations. The tentacles of the home-loan market are starting to strangle portions of the debt, equity and even the normally staid money market.
Bernanke is fully sensitized to the collateral damage damaged collateral can cause. Over and over in speeches during his stint as Fed governor from 2002 to 2005, he returned to the subject of the Great Depression, detailing where the Fed went wrong and what the Fed could have done to ameliorate the problems of the banks (provide liquidity or lower interest rates).